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Sit down with D.C. investor Bill Reich as we take a look at how he structure his creative deals in his crazy expensive market.
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Propstream wrote a great article on Creative Deal Structures:
How To Use Creative Financing To Do More Deals and Increase ROI
Creative financing has enabled many investors to get into real estate even with little money and poor credit.
Not only does creative financing allow investors to purchase properties using less of their own money, but it also enables them to secure more deals. By having these tools in your toolbelt, you will be able to buy houses where a cash offer would never make sense.
In this article, we've covered the details about creative financing as well as the most common strategies that investors use.
What is Creative Financing?
Creative financing in real estate involves using specialized tactics to limit the amount of money you have in a deal, avoid using traditional lenders, or both. Instead of relying on cash or banks to fund their projects, creative financing investors lean heavily on other forms of leverage, such as owner financing.
Many people don't realize it, but it is entirely feasible to purchase a house while leaving the seller's loan in place. It is also possible to make a large amount of money from a property without ever owning it.
Most creative financing strategies focus on “terms” rather than price only. When buying on terms, the seller typically doesn't receive the bulk of the proceeds of the sale upfront. Instead, they receive a small portion upfront, monthly payments along the way, and the remainder at a date in the future.
Here are some of the most common creative financing strategies investors use.
Subject To
Buying a property subject to the existing financing is arguably the most lucrative creative financing strategy available. And the good news is that it's relatively straightforward. In a basic subject-to transaction, you as the buyer will simply take over the seller's loan balance and monthly payments.
Wraparound Mortgage
This strategy gets its name because the new loan “wraps around” the existing mortgage and covers it. Because the monthly payment is at or above the original payment, the payment from the buyer first goes to pay the seller's mortgage payment, and the seller then keeps whatever is left over.
Seller Carry-Back
What if the seller owns the house free and clear? That makes the process even simpler!
Instead of covering an original mortgage, the new loan created with the seller, called a seller carry-back, is the only debt tied to the property.
When structuring this owner-financed deal, you create a loan with the seller instead of going to a lender for the funds to purchase a house. And the seller doesn't have to provide the funds for the purchase. They just deed you the property in exchange for a promissory note that explains how you will pay them back the principal amount with interest.
Lease Option
The first three creative financing strategies discussed above are forms of owner financing, but lease options are slightly different. However, this tactic still involves buying on terms by paying the seller the purchase price over time instead of in a lump sum.
Benefits of Creative Financing
Creative financing offers benefits for both buyers and sellers. While it doesn't fit every deal, knowing the benefits it provides you as an investor and how it can help sellers will help you structure and close more profitable deals.
How Creative Financing Helps Investors
The primary goal of an investor is to grow their money as quickly as possible. One metric that real estate investors use to track their success is cash-on-cash return. The only two ways to increase your cash-on-cash return are by maximizing your income or minimizing the amount of your own capital you have invested. Because you can significantly limit the amount of money you have in each deal with creative financing, you can achieve much higher returns than are possible with any other methods.
How Creative Financing Helps Sellers
The first benefit is that you can generally pay a much higher price when buying on terms than if you were paying cash for a house. Most of the time, creative financing strategies are used to acquire rental properties. Since you can limit your money out of pocket with these tactics, you can still keep your cash-on-cash return high even when paying full price.
Source: propstream.com
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